What is a V-shaped recovery and how is it different from other recoveries?

A V-shaped recovery depicts an economic situation where a severe downturn in the markets is met with an equally strong upturn in the markets. The V refers to the general shape a chart forms based on various data, such as unemployment, retail sales, industrial output, the shape of equity indexes or other metrics. Other recession recovery types often mentioned include the L-shape, U-shape, J-shape, W-shape and many others.

An L-shaped recession is a severe type of recession where there is be a prolonged period of flat or minimal improvements in the economy. An L-shaped recession could persist for years, essentially flatlining with years of stagnant growth. A common example of an L-shaped recession was the situation in Japan in the 1990s - an environment where loose lending standards led to a collapse in share prices and property prices. The economy started to rebound around 2003, and the time period leading up to 2003 is often referred to as the "lost decade" for Japan. This period was characterized by large bank failures, near 0% interest rates, rampant homelessness and increased government spending.

A U-shaped recovery is a more normalized recovery to a recession, where the economy gradually grows its way out of the recession. A W-shaped recovery generally starts out as a V-shaped recovery but another economic event may send the economy back down to previous lows which would be followed by another rebound to finish off the W-shape. The middle portion of the W-shape could also represent a significant bear market rally.

For more on recessions, take a look at our article Recession: What Does It Mean To Investors?

This question was answered by Joseph Nguyen.

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